It’s getting harder and harder to do business with the EU On July 1st, 2021, new EU VAT rules began to apply to e-commerce that target online platforms and B2C imports of all types and sizes. 

Moreover, the EU is now implementing broad new rules for disclosing cross-border arrangements if certain tax-dodging “hallmarks” exist, due to DAC 6 (Council Directive 2018/822). We discuss here DAC6.

DAC is short for Directive on Administrative Cooperation, the sixth one passed by the EU.

DAC6 aims to uncover potential tax avoidance but has been criticized for overkill. Many innocent arrangements may need reporting to an EU tax authorit. Multinational groups, financial institutions, and e-commerce businesses may be affected.

The implementation date for DAC 6 reporting was generally January 1st, 2021, but some EU countries allowed a few extra months without fines, e.g., Cyprus. 

But DAC6 applies retroactively to reportable arrangements from June 25th, 2018.

Following is a summary.

Basic Rules:

A “cross border arrangement” is an arrangement concerning more than one EU member state and/or a third country where one of the following applies:

• Not all the participants are resident for tax purposes in the same jurisdiction (e.g., multinationals);
• One or more participants is a dual-resident;
• One or more participants has a permanent establishment in another jurisdiction;
• One or more participants carries on an activity in another jurisdiction without a permanent establishment (e.g., e-commerce).
• Possible impact on automatic exchange of information or identification of beneficial ownership (e.g., trusts).

A “reportable cross border arrangement” is one containing any of the hallmarks discussed below.

Reporting is required by an “intermediary” that designs, markets, organizes, or makes available a reportable cross-border arrangement or could be reasonably expected to know they did so.  The intention is lawyers or accountants. In addition, the Intermediary should have a link to the be the EU: resident, permanent establishment, incorporated, legally governed, or registered with a professional association there.  

If a lawyer claims legal privilege, the reporting responsibility passes to any other intermediary, or failing that, the relevant taxpayer. 

DAC 6 requires reporting within 30 days after availability, readiness, or the first step of the reportable cross-border arrangement and every three months after that. 

Hallmarks:

Any hallmark may trigger a “reportable cross border arrangement.” Many hallmarks are subject to the “main benefit test,” namely a person may reasonably expect to obtain a tax advantage. 

Hallmarks in the EU subject to the main benefit (tax advantage) test include:

• Confidentiality.
• Intermediary enjoys a success fee.
• Substantially standardized documentation.
• Acquiring a loss-making company, discontinuing its main activity and using its losses.
• Converting income into capital, gifts, or revenue taxed at a lower level or exempt from tax.
• Round tripping of funds by interposing entities without other primary commercial function, or transactions that offset or cancel each other.
• Deductible cross-border payments to an associated enterprise that benefits from full exemption or a preferential tax regime in its country of residence.  

Hallmarks in the EU where the main benefit (tax advantage) test is not stipulated:

• Deductible cross-border payments to an associated enterprise resident nowhere or in a jurisdiction that imposes zero or almost zero corporate tax, or in a non-cooperative jurisdiction per EU member states or the OECD (Comment: this may catch e-commerce from a cloud in a tax haven).
• Assets depreciated in more than one jurisdiction.
• Asset transfers where there is a material difference in the consideration recognized in the jurisdictions concerned.
• Use of transfer pricing “safe harbor” rules (not defined).
• Transfer of hard-to-value intangibles between associated enterprises where no reliable transfer pricing comparables exist or future cash flows, income, or assumptions are highly uncertain.
• Intragroup transfer of functions and/or assets and/or risks reducing projected earnings before interest and taxes (EBIT) by over 50% in the following three years.
• An arrangement undermining automatic exchange of financial account information;
• “Non-transparent” ownership chain using persons, arrangements or structures that: (1) do not carry on a substantive economic activity supported by adequate staff, equipment, assets, and premises, and (2) are incorporated, managed, resident controlled or established in a jurisdiction other than the residence of one or more beneficial owners, and (3) the beneficial owners are made unidentifiable (but not most trusts per the UK HMRC).

Comments:

DAC 6 will affect many international groups with EU links, not only offshore structures. Contact us for more information, tips or premium advice.

What about the UK?

The UK left the EU and replaced DAC6 with a fairly similar Mandatory Disclosure Rules (MDR).

The main difference between DAC 6 and MDR is that only two of the hallmarks where a disclosure is required under DAC 6 are present under MDR. Such arrangements are usually intended to undermine tax reporting under common reporting standard and transparency rules and are split into two types:

• Arrangements that have the effect of undermining reporting requirements under agreements for the automatic exchange of information.
• Arrangements that obscure beneficial ownership and involve the use of offshore entities and structures with no real substance.

An opaque offshore structure means a passive offshore vehicle held through an opaque structure. A passive offshore vehicle is defined as being “a legal person or legal arrangement that does not carry on a substantive economic activity supported by adequate staff, equipment assets and premises, in the jurisdiction where it is established or is tax resident”. This is subject to certain exceptions.

An opaque structure means a structure that it is reasonable to conclude “is designed to have, marketed as having, or has the effect of allowing, a natural person to be a beneficial owner of a passive offshore vehicle, while not allowing the accurate determination of such person’s beneficial ownership, or creating the appearance that such person is not a beneficial owner”.

A non-exhaustive list of examples in the MDR includes use of nominees or indirect control.

HMRC may share and exchange information on these arrangements with other tax authorities.

Note that an MDR reporting requirement may arise if there is a connection to the UK. Therefore, UK-based intermediaries may be required to report arrangements under the MDR that are wholly outside the UK or EU. Previously such arrangements may not have been affected by the UK’s DAC6 rules.

Next Steps:
Please contact us if you need to discuss the above or any other business matter.

Always consult experienced professional advisors in each country concerned – we can help arrange this.

leon@hcat.co

© November 15, 2024